receiving a percentage of the gross receipts of the radiology department. The revenue ruling concluded that the agreement did not jeopardize the hospital's exempt status under IRC 501(c)(3). In support of this conclusion, the following facts were noted: the agreement was negotiated on an arm's-length basis, the radiologist did not control the hospital, the amount received under the contract was reasonable in terms of the responsibilities and duties assumed, and the amount received under the contract was not excessive when compared to the amounts received by other radiologists in comparable circumstances.
A case illustration of a typical attempt to characterize inurement as reasonable compensation is John Marshall Law School and John Marshall University v. United States, 81-2 USTC 9514 (Ct. Cl. 1981). In that case a private, unaccredited, law school and college were operated by two brothers, Theo and Martin Fenster, and members of their families. The Service revoked the exemption of both organizations on the ground that part of the net earnings of the organizations inured to the benefit of private shareholders or individuals. The organizations filed a declaratory judgment action in the Court of Claims. The Court opened its discussion of the case by noting that
[t]he term "net earnings"…has been construed to permit an organization to incur ordinary and necessary expenses in the course of its operations without losing its tax-exempt status. . . .The issue, therefore, is whether or not the expenditures JMLS paid to or on behalf of the Fenster family were ordinary and necessary to JMLS operations. Supra, at 87,685.
The Court detailed with particularity each of a series of interest-free, unsecured loans used by the Fensters to purchase a home and furnish it, the granting of noncompetitive scholarships to the Fenster children, and payment of nonbusiness related expenses for travel, health spa membership and entertainment. Although one of the loans was evidenced by a promissory note, the note made no provision for a definite repayment schedule. In response to the argument that one of the scholarships was merely the equivalent of a death benefit (Martin Fenster had been murdered three months earlier), the Court acknowledged that a death benefit was authorized under the tax Code but stated that the section had nothing to do with authorizing inurement of earnings of the organization to an individual. The Service's revocation of the organizations' exemptions was upheld.
3. Other Examples
